Disclosure: I am long HOLL. HOLL is an illiquid micro cap with a wide bid ask. This article is intended for idea generation only. Please do your own research and use limit orders.
Hollywood Media (NASDAQ:HOLL) shares are up ~10-15% today. While such moves are not uncommon in micro-caps, moves on this heavy of volume (25x normal daily volume by 1 PM) with no press releases are pretty rare. Moves like this beg the question: what's going on?
The answer is that clever investors took a look at the 15th circuit website and saw that the Hollywood Media vs AMC lawsuit has been removed from the docket as "settled". And investors who were clever enough to check the website also quickly figured out that the upside from a potential positive settlement greatly exceeds the downside from a negative settlement.
Obviously, terms of the settlement have yet to be disclosed, so those clever investors are making something of a bet. And anything can happen when it comes to litigation, so the bet is far from a sure thing and the risk should be sized appropriately. However, as this article contends, the "bet" represents an incredibly favorable call option - if the settlement is in Hollywood's favor, investors could be looking at a share price significantly higher than today's in the very near future. If the settlement is against Hollywood, then the downside is likely relatively limited. In fact, the downside may be a stock price that ends up higher than today's price.
Let's start by discussing Hollywood's assets. The company has four main assets:
- The company has $24.9m in cash, or just under $1.10 per share on 23m shares outstanding
- The company has a small, money losing intellectual properties division that's likely worth nothing, or possibly even a net negative given on-going operating losses.
- The company owns 26.2% of movietickets.com
- The company has its on-going lawsuit against AMC (NYSE:AMC).
So what is movietickets.com worth? Well, it's tough to guess, but this news article covering the history of the Hollywood / AMC lawsuit provides a decent starting point. Comcast offered to buy movietickets for $160m in 2007, which would value Hollywood's 26% stake at $41m, or just under $1.60 per share. Of course, that valuation is stale - according to HOLL's 10-k, movieticket's did $13.1m in revenue in 2007, $18.1m in 2008, and $13.8m in 2012. It did $4-6 in EBITDA in 07/08 and operated at a slight EBITDA loss in 2012. The reason for the big drop off in sales and earnings is because AMC pulled its theaters from movietickets and switched them to competitor fandango.
But I think the valuation is also quite instructive - first, it shows that, on a similar level of revenue, movietickets could be worth a significant amount of money. Second, it shows just how much economic damage AMC pulling their inventory from movietickets has done.
It's reasonable to think the movietickets segment is worth less than $160m based on today's earnings. In fact, it almost certainly is if AMC continues to give Fandango exclusive access to its inventory. I would guess in its current form, movietickets is worth only 3x sales, or ~$40m, implying HOLL's stake is worth just over $10.4m, or $0.45 a share, which would combine with the cash to give HOLL a per share value of $1.50 or so.
That decrease in movietickets value leads us to the lawsuit. AMC withholding its inventory clearly caused a huge loss in value for movietickets. How much value? Well, in its press release announcing the lawsuit, movietickets estimated that it would be worth in excess of $500m if AMC would give movietickets all of its inventory as originally agreed. That would make HOLL's stake worth at least $130m, or over $5.65 per share.
Not only would HOLL's stake be worth that much, but AMC would likely need to pay HOLL damages for not putting its inventory on movietickets as originally agreed. I'm no lawyer, so I'm not going to estimate damages, but they could obviously be significant.
Of course, there are possible middle grounds to the settlement. Maybe AMC doesn't pay damages but just puts all of its inventory on movietickets. Maybe AMC pays movietickets to release it from the original agreement. The possibilities are wide, and given the two parties settled instead of litigated, these two options are probably somewhat more likely than the bull case of moving all inventory to movietickets plus paying damages.
But the bottom line is this: the potential from a favorable settlement massively outweighs the limited downside from an unfavorable one. Again, anything could happen when it comes to litigation and settlements, but the large upside appears to outweigh the limited downside at today's prices.
Repeated Disclosure: I am long HOLL. HOLL is an illiquid micro cap with a wide bid ask. This article is intended for idea generation only. Please do your own research and use limit orders.
Disclosure: I am long HOLL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.